A person preparing to retire has a billion VND in savings and still owes 700 million VND for buying a house. If you use 700 million VND immediately to settle, the monthly debt repayment will disappear, and the feeling of "retiring without debt" will also be lighter.
But that person only had 300 million VND in cash left.
If there is a large expense for health, house repair or family support afterwards, the seemingly safe decision creates another problem: the house is out of debt but the money that can be used immediately is too little.
Therefore, before retirement age, the important question is not only "how much debt is left" but what debt is threatening cash flow after income decreases.
Prioritize high-interest debt
The group that should be handled first is usually credit card debt and high-interest consumer loans.
The investor information page of the US Securities and Exchange Commission recommends prioritizing high-interest debt repayment because it is very difficult to achieve an investment return that is definitely enough to cover interest costs.
For people about to retire, the problem is even clearer. When working, debt repayment can be compensated by salary, bonuses or additional income. When stable income decreases, the same monthly payment can become a major pressure.
Loans with changed interest rates, nearing the end of the preferential period or the amount to be paid monthly with an increased risk also need to be reviewed soon.
Home loans do not necessarily have to be paid at all costs
Many people want to enter retirement age with a house completely free of debt. This is reasonable if installment payments account for the majority of monthly income.
But not everyone should take all their savings to settle the loan to buy a house.
A low-cost loan, with monthly payments still within retirement income, may be less worrying than having to withdraw almost all cash to pay debts.
Instead of just looking at the outstanding debt, it is necessary to calculate: after taking the expected income at retirement minus essential living expenses and monthly debt repayment, how much is left?
If the remaining amount is consistently too low or negative, that debt needs to be settled before resignation.
Don't turn the reserve fund into debt repayment money
A common blind spot is considering the entire amount of money in the account as money that can be used for settlement.
CFPB, the US consumer financial protection agency, considers emergency funds as money specifically for unexpected expenses such as healthcare, car repairs or house repairs. FINRA also gives a reference milestone of about three to six months of living expenses for the contingency fund, depending on each person's circumstances.
For retirees, liquidity is even more important because the ability to earn more money to compensate for an event is often more limited than when they were working.
Therefore, before paying off a large loan, it is necessary to look at the remaining amount after settlement, not just the amount of savings.
Be careful with debts in the name of relatives
People preparing to retire should also review loans under their names, guarantees for their children or use their assets to secure the obligations of others.
Although relatives are currently paying evenly, this can still become their financial obligation if there is an incident.
In particular, loans that may affect the house you are living in or essential assets need to be considered more carefully before revenue sources decrease.
Before the retirement date, a simple table can be made including outstanding debt, interest rates, monthly payment amount, remaining time, collateral and pre-payment costs.
High-interest debts and those that make monthly cash flow tense should be prioritized for handling. Low-cost loans, still within the ability to pay, do not necessarily have to be written off at all costs if the price of the provision fund is almost gone.
The goal of retirement age is not to achieve 0 VND of outstanding debt by all means. Because debt recovery can bring a sense of security. But if to have that relief and have to scrape almost all the money for old age, a worry may just be changed into another worry.
